Paper presented at Industrial Engineering and Management Conference, Technical College, Tsing Yi, The Vocational Training Council of Hong Kong, 1998
Future Development Directions
for the Global Competitiveness
of Hong Kong Manufacturing Industries
Humphrey Y.H. Lee1, V.M. Rao Tummala2,
Richard C.M. Yam1 and Patri K. Venuvinod1
1 Department of Manufacturing Engineering and Engineering Management,
City University of Hong Kong, Hong Kong
2 College of Business, Eastern Michigan University, USA
ABSTRACT
In this era of global markets and owing to the impact of the current financial turmoil in East Asian economies, Hong Kong's manufacturing sector is facing much stiffer competition in the global markets. Despite the current financial turmoil in the Asia-Pacific region, following its remarkable economic development in the last few decades and the comparatively stable environment, China is expected to develop the capacity to revitalise, the world economy in the next century ¾ albeit with some difficulty,. Hong Kong SAR has been facing keen competition from the other three 'little dragons' for years. Following the current economic turmoil, Hong Kong will be challenged more through increasing rivalry from the emerging East Asian countries. Hong Kong's manufacturing industries must seize the profound opportunities offered by the world market in the 21st century by becoming more globally competitive. In this paper, the future directions for the globalisation of Hong Kong manufacturing industries are studied on the basis of a survey and structured interviews encompassing the major sectors of Hong Kong manufacturing industry. The results are analysed in the light of four well-established models of national economic development. It is concluded that the manufacturing sector is as important as the service sector for the stability and growth of Hong Kong and that Hong Kong's manufacturing sector needs to rapidly acquire greater technological sophistication.
1. Hong Kong Manufacturing Industries: Threats and Opportunities
Owing to the absence of natural resources resulting from a scarce supply of land, Hong Kong has difficulty in developing land-intensive or heavy industries. Hong Kong has so far concentrated on the manufacture of light consumer and labour-intensive industries. In contrast, in order to withstand stiff competition in the world market, the other three little dragons, namely Korea, Taiwan, and Singapore, have adopted the strategy of developing their manufacturing sectors through proactive policies that emphasise product innovation and technology sophistication in addition to quality enhancement. Hong Kong has already taken several steps in the third direction (quality enhancement) but is only starting to discuss the first two aspects. Therefore, Hong Kong faces the danger of losing competitive edge.
The origin of Hong Kong's current problems as well as it's past decisions lie in its high wages and land costs. To counteract these threats, Hong Kong's manufacturers had opted to move out into mainland China in view of the abundant supplies of much cheaper land and labour resources available there.
Over the past fifteen years, most Hong Kong manufacturers have been shifting their labour-intensive production activities across the border. The extent of relocation can be noted from the proportion of outward processing trade handled with the mainland. The total exports from Hong Kong to the mainland for outward processing in 1995 resulted in an annual growth of 20%. Of the total exports of this type, about 71% of domestic exports and about 45% of re-exports were attributed to outward processing activities in the mainland. Moreover, 74% of imports from the mainland and 82% of re-exports of mainland origin (except to the mainland itself) were also related to outward processing trade with the mainland. It is not surprising therefore that, since 1989, mainland China continued to occupy the role of being the primary country of origin of Hong Kong’s re-exports trade. In addition, in the same period, mainland China had become the primary destination of the re-exports trade initiated by other countries.
Despite the economic advantages of low labour cost and cheap land in mainland China, Hong Kong needs to face intense cost rivalry from such newly emerging East Asian economies such as Thailand, Malaysia, Indonesia, and the Philippines. This is particularly true now owing to the impact of the devaluation of the currencies of these countries. Further, many Hong Kong manufacturers have been suffering from escalating labour and land costs in such cities as Shenzhen and Dongguan which are situated close to it's borders. Consequently, Hong Kong enterprises have had to relocate their production plants even further away to places associated with lower running costs. This ongoing relocation of manufacturing industries has however been leading to shrinking domestic manufacture in Hong Kong. This can be seen from the decline in the manufacturing share of the Gross Domestic Product (GDP) from 23.7% in 1980 to 11.2% in 1993 and further to 7.2% in 1996.
It should be evident from the above that Hong Kong manufacturing industries are not only lacking in technological competitiveness but are also rapidly losing their cost competitiveness. Nevertheless, what is now happening is not that manufacturing is hollowing out but an industrial transformation is in progress. This can be surmised from the fact that manufacturing sector is diminishing in conjunction with sustained increases in both gross manufacturing output and manufacturing labour productivity. The gross output of Hong Kong’s manufacturing industries rose rapidly from HK$116,585 million in 1980 to HK$348,161 million in 1989 and then gradually levelled off to HK$298,081 million in 1994. On the other hand, the annual growth in manufacturing labour productivity was observed to be 12% in 1996, following a 14% rise in 1995. Jobs requiring higher level of skill and greater professional and managerial expertise were increasing in number while the proportion of jobs for factory floor operations was correspondingly reduced. Further, labour productivity increase was reported to be in correlation with significant enhancement in capital and human resources investment in manufacturing industries that had stayed back in Hong Kong. Consequently, it may be said that Hong Kong is actually undergoing an industrial transformation. This process of transformation however needs to be guided through informed public debate so that, in the irreversible process of globalisation, Hong Kong is able to develop far-sighted strategies towards enhancing its global competitiveness.
2. Economic Development of a Country or Region
In investigating the direction in which Hong Kong manufacturing industries should be spurred, valuable insights may be derived from four well established national development models: Porter’s National Development Model [Porter 1980, 1990], Dunning’s Investment Development Path [Dunning 1988], Narula’s Dynamic Competitive Development Model [Narula 1993], and Si’s economic development study [Si 1993]. These models were developed by the originators essentially to study how a country transits from one stage of development to another.
Porter set forth four stages of national competitive development, namely factor-driven, investment-driven, innovation-driven, and wealth-driven stages [Porter 1980, 1990]. Nations develop from a stage of merely utilising basic factors of production and imported technology (factor-driven) to a stage of being able to apply and improve acquired foreign technology (investment-driven). Nations then develop further to create advanced factors of production by engaging in technological innovation on their own (innovation-driven). After this stage, nations begin to lose advantage (wealth-driven) due to reducing rivalry and a drop in demand conditions. Only industries associated with high-income consumption such as services, as well as those that derive their competitive advantage from ‘inherited’ endowments from a previous stage of development remain internationally competitive.
Dunning improved on Porter's model by analysing the development of a country in terms of Ownership-specific advantages (O-Advantages), Internationalisation-incentive Advantages (I-Advantages) and Location-specific Advantages (L-Advantages), and incorporated the effect of foreign direct investment (FDI) to evolve the national Investment Development Path [Dunning 1988]. According to his thesis, countries evolve from a pre-industrialisation stage (Stage 1) to a stage (Stage 2) which depends on inward direct investment (IDI) for import substitution and labour-intensive manufacturing activities. Countries then improve their legal, business, physical and communication infrastructures and adopt export-oriented policies to enhance their L-advantages and probably their local market demands. These attract further IDI and thus encourage the countries to build up their own O-advantages (Stage 3). Subsequently, countries shift their L-advantages to attract technological infrastructure and a pool of skilled labour. As a result, countries are capable of accumulating O-advantages on their own. Countries start to export capital so that ODI (outward direct investment) exceeds IDI (Stage 4). Countries which possess excellent economic performance will have to strengthen their technological sophistication to maintain their net ODI position. The locational decisions of multinational enterprises (MNEs) depend on how to compete against the strategies of regional or global competitors (Stage 5).
Narula argued that ‘international business and technology accumulation’ has to be added as an agent to inject dynamics to Porter’s competitive development model [Narula 1993]. Countries get rid of the reliance on basic factors of production for economic development (Stage 1) by improving their infrastructure to foster innovation and the acquisition of productive equipment so that the technological accumulation rate can be accelerated (Stage 2). IDI (Inward direct investment) will increase to enhance the growth of related and supporting industries as well as the accumulation of technological advantages and product modification ability. O-advantages are increased which enhance L-advantages as well. Countries then gear towards mass production of medium-technology products. Advanced factors related to O-advantages are enhanced through technology accumulation in technological, managerial and marketing know-how. Modification and adaptation of technologies as well as indigenous applied R&D appear. Production activities suffering from low productivity are shifted to countries at lower stages. Overseas markets are exploited. These activities lead to the rise of outward direct investment, ODI (Stage 3). Countries then use capital intensive production facilities to generate state-of-the-art products. Both basic and applied R&D are undertaken locally. ODI grows while IDI decreases (Stage 4). Highly industrialised countries are presently at the next stage. These countries have slowing economic growth. They possess similar competitive advantages in technology, as well as increasing homogeneity of social and demand conditions and similar market structures (Stage 5).
Si (1993) structured his analysis of Asia-Pacific economic development into a three-stage model [Si 1993]. Countries at the first stage rely on technology introduction. To transfer to the earlier stage of the second stage, countries tend to be dominated by technology introduction by involving in both technology introduction and innovation. To enter the latter stage of the second (i.e. that dominated by technology exports) and the third stage (i.e. technology export), countries have to focus on innovation and structural adjustment.
3. The Current Situation: Survey Results
A questionnaire survey was conducted in early 1997 on the major Hong Kong manufacturing sectors to investigate the global competitiveness of Hong Kong's manufacturing industries. The questionnaire survey findings were followed and verified by structured personal interviews with the survey respondents to avoid any misunderstanding of the questionnaire information and to get more in-depth understanding of their opinions. 400 Hong Kong manufacturing companies from the electrical and electronic products sector, metal industry sectors and plastic product and other industry sectors were randomly selected for this study. Out of these , 62 or 15.5% of acceptable questionnaires were returned. Some findings of this study have been applied to investigate the manufacturing support for Hong Kong manufacturing industries in Southern China [Lee 1998] and the global competitiveness strategies for Hong Kong manufacturing industries [Tummala 1998]. The survey findings revealed the general practices and opinions of the respondents on the development of Hong Kong's manufacturing industries.
In the following, we will firstly summarise the major findings of the study. Based on the results of the study, we can obtain insights into how the survey respondents perceived the state of Hon Kong's manufacturing industry. Next, through an analysis of the findings on the basis of the national economic development models, we will identify directions for the future development of the global competitiveness of Hong Kong's manufacturing industries.
The major findings of the survey study can be summarised as below.
a) Hong Kong manufacturing industries are facing strong global competition and significant market demand, especially domestic demand, and demand from the three Asian little dragons (Taiwan, South Korea and Singapore) and some Asia-Pacific developing countries. 77% and 79% of the respondents agreed that their products were experiencing ‘moderate to very strong’ competition from the local competitors and those from the little dragons . About 58%, 71% and 61% of them indicated that the local, dragons’ and Asia-Pacific developing countries’ customer demands are ‘increasing or strongly increasing’.
b) The majority of the respondents (more than 80%) agreed that the primary factors related to competitiveness for Hong Kong manufacturers were cost of production, quality enhancement, and time-to-market. Technology sophistication and product innovation were also considered very important and ranked only next to the previous three factors.
c) The majority (about 95%) of the companies responding had already relocated their labour-intensive production operations to Southern China although some of them (about 45%) also had production operations in Hong Kong. In contrast, relatively fewer companies had relocated their technology-intensive production operations to Southern China and a number of them (about 71%) had retained their operations in Hong Kong.
d) The majority (about 70%) of the companies were found to have ‘more than 50%’ of their ‘management support’, ‘international marketing’, ‘research and development’, and ‘product design and development’ activities located in Hong Kong. On the other hand, nearly all of them had moved their production-related support activities, namely, ‘production planning’, ‘product testing and packaging’, ‘materials management’, and ‘inventory and warehousing’, across to the two sides of the border between Hong Kong and southern China.
e) The majority (more than 80%) of the respondents agreed that the free and export-oriented economy, low tax system, finance and banking facilities, transportation facilities and network, and information technology and telecommunication infrastructure available in Hong Kong were ‘important or very important’ and that the performance of these were ‘moderate to excellent’.
f) Almost all respondents strongly agreed that advanced technologies would affect the global competitiveness factors listed in point (b) above. In view of technology advancement, they thought that both technology innovation and technology/management know-how transfer could affect technology and managerial competencies.